(a) A Federal credit union with derivatives authority that no longer meets the requirements of this subpart or fails to comply with its approved strategy (including employing the resources, policies, procedures, accounting, and competencies that formed the basis for the approval) must:
(1) Immediately stop entering into any new derivatives transactions until the Federal credit union is in compliance with this subpart. During this period, however, the Federal credit union may terminate existing derivatives transactions. NCUA may permit a Federal credit union to enter into offsetting transactions if NCUA determines these transactions are part of a corrective action strategy.
(2) Within three business days from the regulatory violation, provide the appropriate field director notification of the regulatory violation, which must include a description of the violation and the immediate corrective action the Federal credit union is taking; and
(3) Within 15 business days after notifying the appropriate field director, submit a written corrective action plan to the appropriate field director.
(b) NCUA may revoke a Federal credit union's derivatives authority at any time if a Federal credit union fails to comply with the requirements of this subpart. Revocation will prohibit a Federal credit union from executing any new derivatives transactions under this subpart, and may require the Federal credit union to terminate existing derivatives transactions if, in the discretion of the applicable field director, doing so would not pose a safety and soundness concern.
(c) Within 60 days from the date of the related field director's action, a Federal credit union may appeal the following to the NCUA Board:
(1) NCUA's revocation of a Federal credit union's derivatives authority; and
(2) NCUA's order that a Federal credit union terminate existing derivatives positions.
(d) With respect to an appeal regarding revocation of a Federal credit union's derivatives authority, the Federal credit union may not enter into any new derivatives transactions until the NCUA Board renders a final decision on the appeal. The Federal credit union may, however, elect to terminate existing derivatives positions. With respect to an appeal regarding an order to terminate a Federal credit union's existing derivatives positions, the Federal credit union is not required to terminate any existing positions until the NCUA Board renders a final decision on the appeal.
(3) Through the originator's initial written communication with a consumer, if any, whether on paper or electronically.
Sec. Appendix to Subpart B--Examples of Derivative Limit Authority
Calculations
Limit authority. A Federal credit union that is approved for derivatives authority under Sec. 703.111 may use any of the products and characteristics described in Sec. 703.102(a), subject to the following position and risk limits:
Table 1--Authority Limits----------------------------------------------------------------------------------------------------------------
Entry limits (first 12
Limit authority months of transactions) Standard limits----------------------------------------------------------------------------------------------------------------Fair Value Loss (See (a) below)........... 15% of net worth............ 25% of net worth.Weighted Average Remaining Maturity 65% of net worth............ 100% of net worth.
Notional (WARMN) (See (b) below).----------------------------------------------------------------------------------------------------------------
(a) Calculating the fair value loss limit for compliance with this subpart. To demonstrate compliance with the fair value loss limit authority of this subpart, a Federal credit union must combine the total fair value (as defined by product group below) of all derivatives transactions. The fair value loss limit is exclusive to the derivatives positions (not net of offsetting gains and losses in the hedged item).
(1) The resulting figure, if a loss, must not exceed the Federal credit union's authorized fair value loss limit:
(i) Options--the gain or loss is the difference between the fair value and the unamortized premium at the reporting date;
(ii) Swaps--the gain or loss is the fair value at the reporting date; and
(iii) Futures--the gain or loss is the difference between the exchange closing price at the reporting date and the purchase or sales price.
(2) Example calculations for compliance with this subpart: fair value loss limit. The table below provides an example of the fair value loss limit calculations for a sample Federal credit union that has entry level authority. The sample Federal credit union has a net worth of $100 million and total assets of $1 billion; its fair value loss limit is -$15 million (15 percent of net worth).
Table 2--Example Fair Value Loss Calculations--------------------------------------------------------------------------------------------------------------------------------------------------------
Fair value gains (losses)
------------------------------------------------------------------------ % of Net worth Limit violation
Options Swaps Futures Total (percent)--------------------------------------------------------------------------------------------------------------------------------------------------------Scenario A............................... $1,000,000 $2,000,000 $200,000 $3,200,000 3 No.Scenario B............................... 5,000,000 10,000,000 2,000,000 17,000,000 17 No.Scenario C............................... 1,000,000 (3,000,000) 250,000 (1,750,000) (2) No.Scenario D............................... 1,000,000 (20,000,000) (2,000,000) (21,000,000) (21) Yes.Scenario E............................... (2,000,000) (10,000,000) 1,000,000 (11,000,000) (11) No.--------------------------------------------------------------------------------------------------------------------------------------------------------
(b) Calculating the WARMN exposure for compliance with this subpart. The WARMN calculation adjusts the gross notional of a derivative to take into account its price sensitivity and remaining maturity. The WARMN limit is correlated to the fair value loss limit, as described in paragraph (a) of this appendix, for a 300 basis point parallel shift in interest rates. To demonstrate compliance with the WARMN limit authority of this subpart, a Federal credit union must calculate the WARMN using the following reference table, definitions, and calculation steps:
Table 3--Summary of WARMN Calculation----------------------------------------------------------------------------------------------------------------
Adjustment
Product Step #1 gross factor Step #2 adjusted Step #3 WARM
notional (percent) notional----------------------------------------------------------------------------------------------------------------Options (Caps)................. Current 33 33% of current Time remaining to maturity.
notional notional.Options (Floors)............... Current 33 33% of current Time remaining to maturity.
notional notional.Swaps.......................... Current 100 100% of current Time remaining to maturity.
notional notional.
Futures........................ Contract size 100 100% of contract Underlying contract.
size.
Sum = Total Sum = Overall WARM
Adjusted Notional.----------------------------------------------------------------------------------------------------------------Step #4 WARMN = Adjusted Notional x (WARM/10)----------------------------------------------------------------------------------------------------------------
(1) Step #1--Calculate the gross notional of all outstanding derivative transactions. (i) For options and swaps, all gross notional amounts must be absolute, with no netting (i.e., offsetting a pay-fixed transaction with a receive-fixed transaction). The gross notional for derivatives transactions with amortizing notional amounts is the current contracted notional amount, in accordance with the amortization schedule.
(i) For options and swaps, all gross notional amounts must be absolute, with no netting (i.e., offsetting a pay-fixed transaction with a receive-fixed transaction). The gross notional for derivatives transactions with amortizing notional amounts is the current contracted notional amount, in accordance with the amortization schedule.
(ii) For futures, the gross notional is the underlying contract size as designated by the Chicago Mercantile Exchange (CME) product specifications (e.g., a five-year Treasury note futures contract will use $100,000 for each contract purchased or sold and reported here on a gross basis for limit purposes.)
(2) Step #2--Convert each gross notional by its derivative adjustment factor to produce an adjusted gross notional. The derivative adjustment factor approximates the price sensitivity for each of the product groups in order to weight the notional amount by sensitivity before weighting for maturity.
(i) For cap and floor options, the derivative adjustment factor is 33 percent. For example, an interest rate cap with a $1 million notional amount has an adjusted gross notional of $330,000 ($1,000,000 x 0.33 + $330,000).
(ii) For interest rate swaps and Treasury futures, the derivative adjustment factor is 100 percent. For example, an interest rate swap with a $1 million notional amount has an adjusted gross notional of $1,000,000 ($1,000,000 x 1.00 = $1,000,000).
(iii) The total adjusted notional for all derivatives positions is the sum of (i) and (ii) above.
(3) Step #3--Produce the weighted average remaining time to maturity (WARM) for all derivatives positions. (i) For interest rate caps, interest rate floors, and interest rate swaps, the remaining maturity is the time left between the reporting date and the contracted maturity date, expressed in years (round up to two decimals);
(i) For interest rate caps, interest rate floors, and interest rate swaps, the remaining maturity is the time left between the reporting date and the contracted maturity date, expressed in years (round up to two decimals);
(ii) For Treasury futures, the remaining maturity is the underlying deliverable Treasury note's maximum maturity (e.g., a five-year Treasury note future has a five-year remaining maturity); and
(iii) Determine the WARM using the adjusted gross notional, as set forth in subsection (2) of this section, and the remaining time to maturity as defined for each product group above in paragraphs (b)(3)(i) and (ii) of this appendix.
(4) Step #4--Produce the WARMN by converting the WARM to a percentage and then multiplying the percentage by the total adjusted gross notional. (i) Divide the WARM, as calculated in paragraph (b)(3) of this appendix, by ten to convert it to a percentage (e.g., 7.75 WARMN is translated to 77.5 percent); and
(i) Divide the WARM, as calculated in paragraph (b)(3) of this appendix, by ten to convert it to a percentage (e.g., 7.75 WARMN is translated to 77.5 percent); and
(ii) Multiply the WARM converted to a percentage, as described in paragraph (c)(4)(i) of this appendix, by total adjusted gross notional, described in paragraph (c)(2) of this appendix.
(5) Compare WARMN calculation to the WARNM limit for compliance. The total in step four (4) must be less than the limit in paragraph (a)(1)(ii) or (a)(2)(ii) of this appendix, as applicable.
(6) Example calculations for compliance with this subpart: WARMN. The table below provides an illustrative example of the WARMN limit calculations for a sample Federal credit union that has entry level authority. The sample Federal credit union has a net worth of $100 million and total assets of $1 billion; its notional limit authority is $65 million (65 percent of net worth).
Table 4--Example WARMN Limit Calculation----------------------------------------------------------------------------------------------------------------
Options Swaps Futures Total----------------------------------------------------------------------------------------------------------------Gross Notional (Step #1)................ $100,000,000 $50,000,000 $5,000,000 $155,000,000Adjustment Factor....................... 33% 100% 100%Adjusted Notional (Step #2)............. $33,000,000 $50,000,000 $5,000,000 $88,000,000Weighted Average Remaining Maturity 7.00 8.50 5.00 7.74
(WARM) (Step #3).......................----------------------------------------------------------------------------------------------------------------
Weighted Average Remaining \1\ $68,100,000
Maturity Notional (WARMN) (Step
#4):
Notional Limit Authority (65% of $65,000,000
net worth)
Under/(Over) Notional Limit ($3,100,000)
Authority----------------------------------------------------------------------------------------------------------------\1\ (77.4% of Step #3.)